February 21, 2007 — Flip-Flops

Speculative activity has slowed in Myrtle Beach's housing market, but the draw of coastal living remains
By Charles Gerena

In their annual outlook last December, economists at Wachovia Corp. said that the U.S. metro areas with the largest stocks of available housing tended to be where speculative activity was the greatest. Most of these areas are in California and Florida, but speculative activity was also strong along the coasts of North Carolina and South Carolina.

Myrtle Beach, S.C., was among 20 metro areas in June 2005 — near the peak of the housing boom — with the highest percentage of conforming mortgages held by investors. (Conforming mortgages are packaged to be sold in the secondary market; the 2007 limit on conforming loans for single-family homes was $417,000.) About 17 percent of such borrowers in the area never intended to live in the homes that they purchased.

What does it matter if someone buys a home to live in or as an investment? Owner-occupied homes usually don't go back on the market right away, since the seller would have to find another place to live and the expense of commissions and uprooting a family is significant. But no such obstacles impede the sale of homes whose owners live somewhere else, even in another state. So a housing market with a significant number of investors has the potential for greater turnover and higher price volatility, especially when speculators enter the picture.

Investors generally have different expectations than speculators. The former may buy a property that they expect to generate rental income and to appreciate in value over time, yielding long-term capital gains when they eventually sell. The latter may buy a property with little regard to its long-term prospects because they are looking to sell it again quickly. Speculators are drawn to rising markets, but if those markets begin to sour, they are often among the first to flee and can bring housing prices down with them.

Some of the rise in housing prices and growth in construction in Myrtle Beach was due to growing demand. Like other coastal areas, Myrtle Beach and the larger Grand Strand region in northeastern South Carolina are popular with retirees and others looking for a second home as a vacation retreat or a rental property. In addition, real estate prices are still relatively affordable compared to other coastal hotspots like Naples, Fla., or Santa Barbara, Calif. As a result, the number of permits for private housing increased 67 percent in 2005.

In 2006, housing sales weakened in Myrtle Beach as they did in other markets with significant speculative activity. According to Market Opportunity Research Enterprises (M.O.R.E.), a Rocky Mount, N.C., firm that analyzes residential construction markets in the Southeast, closings fell to 21,214 from 24,226 in 2005, a 12 percent drop.

Average home prices continued to rise, however, reaching $256,984 versus $227,570 in 2005. Carl Van Horn, a research analyst at M.O.R.E., says that just because sales have fallen doesn't mean the fundamentals aren't there to support some price appreciation. "You still have people moving to Myrtle Beach. You still have people moving from the Northeast to the South," he says.

Van Horn blames most of the recent sales decline on the condominium submarket, where there is an oversupply of properties near the beach. Condos have been appealing to people who want a vacation home without the overhead expenses. But demand softened in 2006 as higher insurance premiums in coastal regions scared off some buyers. (Condo owners paid higher rates for their homeowner's insurance, as well as higher association fees to property management companies that insure common areas like pools and clubhouses.)

Further, developers wanted to maximize their returns during a slower economy, Van Horn adds. The easiest way to do that was to build higher-density projects like condos. "It only takes a handful of projects before you have a glut."

Myrtle Beach isn't the only metro area in the Fifth District where the condominium submarket is slowing. In Washington, D.C., condo sales fell from a record 13,698 units in 2005 to 6,608 in 2006, according to Delta Associates. The firm also noted in a February 2007 report that nearly 24,000 condos are on the market unsold and an additional 21,804 units are on their way in the next three years, even as projects are being cancelled or being converted into apartments. As a result, median resale prices were essentially flat in 2006.